Question

(A) What are the components of 'Current Ratio'?
(B) What are the different cash inflows and cash outflows of investing activities?

Answer 1

(A) Current Ratio is a liquidity ratio and is also known as the working capital ratio. It measures the firm's ability to pay the short-term liabilities. It is a ratio between the firm's current assets and current liabilities. Thus, the components of current ratio are current assets like stock, debtors, bills receivable, cash, bank balance, pre-paid expenses, etc. and current liabilities like creditors, bills payable, bank overdraft, outstanding expenses, etc. The ideal current ratio is 1.

Current Ratio = Current Assets/ Current Liabilities

(B) The cash inflows from investing activities are:

1. Sale of assets

2. Sale of investments

3. Collection from loans

4. Receipt of Insurance settlements

The cash outflows are:

1. Purchase of fixed assets

2. Purchase of investments

3. Lending of loans